Road to a Tax-Friendly Retirement: Navigating Pension Exemptions


Early planning for your retirement is an important step every employee has to take as it brings a smooth financial journey. Pensions are fixed sums of money that you receive periodically mostly monthly after your retirement. These are taxable under the head salaries in your income tax return. However, a lump sum (commuted pension) instead of a periodical payment can be chosen. Today, pension plans have become fundamental to invest in even if you have extensive investment funds with you. There are different types of pension plans available in India.

Commuted and Uncommuted Pension

There are two types of pension policy, Commuted and Uncommuted. The Employees may choose to receive a certain percentage of their pension in advance at the time of retirement. Such pension received in advance is called commuted pension. This is payable as a lump sum amount. A commuted pension is fully exempt for a government employee. However, for a non-government employee, it is partially exempt under Income Tax Act, 1961.

Uncommuted pension refers to periodic payments received by the individual. The employer and taxpayer contribute together to an annuity fund, which pays the taxpayer’s pension out of the fund. An uncommuted pension is the pension received as periodic payments, usually monthly.

Taxability of Commuted and Uncommuted Pension

Pension is taxed as salary if it is uncommuted but it is also subject to a certain prescribed amount of exemption as per section 10(10A) of the Income Tax Act, 1961.  Commuted or lump sum pension received by government employees is exempt from taxes. Commuted or lump sum pension received by non-government employees is partially exempt depending on whether gratuity is also received by the person.

Read More: Finance Ministry notifies exemption of Pension, PF and Gratuity Benefits for Services rendered by Tribunal Members

The Ministry of Finance vide the Tribunal (Conditions of Service) Second Amendment Rules, 2023 has inserted a new Rule 7A after Rule 7 as follows: “7A Retirement or resignation from parent service on appointment as Chairperson or Member.— Where the person appointed as a Chairperson or a Member is a serving Judge of the Supreme Court or a High Court or a serving Member of an organised service, he shall either resign or obtain voluntary retirement from his parent service before joining the Tribunal.”

As per the amendment, the services performed in the Tribunal will not qualify for the receipt of pension, provident fund, or gratuity benefits.

The CBDT through a circular clarified that “It may be noted that, since salary includes pension, tax at source would have to be deducted from pension also, unless otherwise so required. However, no tax is required to be deducted from the commuted portion of the pension to the extent exempt under section 10 (10A) of the Income Tax Act, 1961. Family Pension is chargeable to tax under the head “Income from other sources” and not under the head “Salaries”. Therefore, provisions of section 192 of the Act are not applicable. Hence, DDOs are not required to deduct TDS on a family pension paid to the person.”

Taxability of Family Pension

The pension received shall be “taxable under head Salary”. As per Section 57(ii)(a) of the Income Tax Act, 1961, if an uncommuted family pension is being received after the death of the employee by the family members, the pension so received would be taxable under the head – “Income from Other Sources” as the employer-employee relationship does not exist in this case. In such a case, where an uncommuted family pension is being received by the family members – 1/3rd of the Pension received or Rs. 15,000 whichever is less shall be exempt. As per Circular No. 573 dated 21/08/1990, if any commuted pension is being paid to the family members, no tax would be levied on commuted pension.

Judicial Decisions on Taxation of Pension

Hindustan Unilever Limited vs. Addl.Commissioner of Income-tax  2023 TAXSCAN (ITAT) 2158

The Income Tax Appellate Tribunal (ITAT) Mumbai bench, while allowing deduction in respect of retirement pension of employees of Hindustan Unilever employees observed that provision for the retirement pension of Hindustan Unilever employees is made for the business purpose. The assessee has claimed liability on account of contribution for which a sinking fund must have the requisite approval u/s 36(1)(iv) or any contribution to the fund shall meet the provisions of se.40A(9). Referring to the provisions of sec.43B the Assessing Officer held that only the actual payment made is allowable. Accordingly, he allowed the sum of Rs.1712.20 lac to be paid and disallowed the balance amount of Rs.2929.23 lac. Finally, the Tribunal ruled in favour of the assessee.

DCIT vs M/s. Future Generali India Life Insurance Co. Ltd 2023 TAXSCAN (ITAT) 1950

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) confirmed the Commissioner of Income Tax (Appeals) [CIT(A)] order of deletion of addition made by the Assessing Officer (AO) on account of the disallowance of Profits from the pension fund. The AO made an addition of an amount of Rs.90, 43, 14,000/- under Section 10(23AAB) of the Income Tax Act,1961 on account of the surplus deficit from the pension fund. The Bench observed that the pension fund scheme was managed by FGILI in A.Y.2010-11 which was approved by IRDA. The assessee had a surplus/deficit of Life Insurance business during the relevant year and the same has been taken into consideration while computing actuarial appointed by the assessee. It was held that the assessee had a surplus from the approved pension scheme during the relevant year and since the same forms part of the Life Insurance business only, the said amount has been accounted for while arriving at the actuarial surplus and that surplus needs to be considered for computing profits from the life insurance business.


The Supreme Court of India, held that the provisions contained in notification no. G.S.R. 609(E) dated 22nd August 2014 is legal and valid; in addition to allowing the employees to pay 8.33% of the salary drawn, instead of 8.33% of Rs. 15,000/- (Rs. 1250/-)  as earlier capped in the amendment. The notification of 2014 amending the statutory pension scheme to a contributory pension scheme resulted in agitations from the employees.

Read More: CBDT notifies Pension Fund ‘Ontario Inc.’ to be eligible for Sec 10(23FE) Income Tax Exemption

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